StatsGuru: Tracking the financial health of lenders

Over the past year, both private and public sector banks (PSBs), prodded by the Reserve Bank of India, have been aggressive in recognising the true extent of bad loans plaguing the system. As shown in Chart 1, gross non-performing assets (GNPAs) of the banking system rose to 8.5 per cent at the end of the first quarter in 2016-17.

But, the divergence between bad loans of public and private banks is staggering. The GNPAs of private banks rose to 2.9 per cent at the end of the first quarter of FY17. By comparison, GNPAs of PSBs soared to 10.4 per cent over the same period.

The only silver lining is that growth in fresh slippages seems to have moderated. According to Kotak Institutional Equities, fresh slippages were 5.4 per cent at the end of the Q1 of FY17, down from 10.6 per cent in Q4 of FY16 as shown in Chart 2. This suggests the rise in headline GNPAs could be of a relatively smaller magnitude.

Beyond the headline numbers, the crisis seems to be worsening. A larger number of loans already recognised as NPAs are under severe stress. As Chart 3 shows, the value of loans classified as doubtful has increased over the past year.

It is possible that while headline NPA numbers do not show a sharp spurt this year, among loans already classified as NPAs, a larger portion slips into doubtful 2 and doubtful 3 categories. Any such deterioration will undoubtedly hit bank's health as the provisioning requirement for banks will increase.

With growth continuing to be sluggish, the capacity of companies to service their interest obligations is under severe pressure. According to India Ratings and Research, banks will need to take, on an average, a 23 per cent haircut for loans to be serviced comfortably by firms, though as shown in Chart 4, the level of haircut varies across sectors. This means banks need to bolster their capital. As Chart 5 shows, only to meet their Tier-1 capital requirements under the Basel-III regime, PSBs need to raise Rs 1.1 lakh crore by FY19.